Friday, May 16, 2008

Immelt to Wall Street's Blackjack Dealers: “Hit Me!”

General Electric Co. is preparing to sell or divest itself of its century-old appliances business, one of the best-known American consumer brands, as Chief Executive Jeffrey Immelt seeks to revive his weakened conglomerate.

GE could receive between $5 billion and $8 billion from a sale of the business, according to people familiar with the matter. A sale would come as the company faces pressure to trim a portfolio that ranges from credit cards to aircraft engines to television broadcasting, following a disappointing first-quarter earnings report.—The Wall Street Journal

Not much more than a year after GE agreed to buy oil service company Vetco Gray from a private equity group for 3.5 times the PE group’s cost; and a bit less than a year after GE backed out of a head-scratching deal to buy two of Abbott Lab’s diagnostics businesses for what looked like 25-times trailing 12-month operating income; and one month after GE reported shockingly poor earnings from one of the few AAA credits left in this world, comes the announcement of further asset-shuffling at the American business icon: the sale of the GE appliance business.

What gives?

Did Jack Welch—whose on-air rant (“Here’s the screw-up: you made a promise that you’d deliver this and you missed three weeks later…”) helped loosen the fast-shifting earth beneath his successor’s feet so quickly that Immelt is now described as “embattled”—leave so much of a mess behind him after twenty years' worth of “delivering” on promises that nobody could stop the cracks from spreading under the whole foundation?

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5 comments:

I have long believed that Jack Welch's "roll up" style (acquiring businesses not because of their ability to add to the long term assets of GE, but because of accounting benefits for immediate gratification) of beating the number would come back to haunt GE. His appearances on CNBC and the fawning over him reminded me of the story of the emperor who wore no clothes. I think we're seeing that happen.

I was short GE at $55 many years ago - the biggest short position I ever had (at least at that time).

Sure Pets.Com was a better short - but in those days most of GE was a bad finance company. And it was 35 times. That was when people were really loopy about this stock.

Immelt has got rid of the mortgage insurer (darn good move that).

He has got rid of the US liability risk (ie litigation risk) business. That will probably be a good move.

He has got rid of the really crappy business of insuring people against needing to get into a nursing home. A brilliant move.

He got rid of plastics. That might not have been a good move. The input costs were killing them - and he did not like that. The input costs just went up and up. But the main use of the plastics was aerospace - and last I looked aerospace was having a massive massive boom - driven by the Chinese wanting to fly.

I wish I knew how the private equity buyers faired with the plastics. But my guess is that they probably did well.

He should have got rid of the appliance business two years ago. Appliances are housing cycle driven - and he is selling them WAY too late. He would have got a really good price a while ago. Its a billion dollars - and the timing is not fantastic.

The real puzzler though. The worst performing division in GE is medical. That was Immelt's own business.

The head-scratching acquisitions which Jeff M points to - that was in medical too.